Every small business owner wants to get top dollar for the company he or she started and raised. But too many start thinking about the sales process too late to get the most value. (See: What Goes Into the Sale Price of Your Business?)
“Most business owners wait to sell their company until they’re mentally frustrated or worn out,” says Greg Caruso, principal at Harvest Associates LLC, a transaction advisory firm in Baltimore.
To get the highest selling price for your business, start planning early. And do these five things:
1. Strive to increase profits and cash flow.
The person or company buying your business will probably need a loan for the purchase—and they’ll be using the business’ profits to make their monthly payments. That’s why maximum profitability, as well as healthy cash flow, is so important to the value of your business. (See: Cash Flow Solutions for Small Businesses.)
Think you’re doing the best you can? Think again, says Caruso. He suggests hiring a part-time CFO or CPA—someone from the outside—to scour your books and operations for inefficiencies. “A lot of business owners don’t understand how to assess where they are, and it can make a huge difference in profitability,” he says. (See: How to Find an Accountant Who’s Right for You.)
2. Grow sales. Period.
Why would you want to spend long hours boosting the revenue of a company you’re about to sell? Because you’ll get more money in the sale. Caruso says if a business’ revenue is consistently growing for two to three years, the buyer is willing to pay a higher price because sales are an indication that they’ll be making more money down the road.
Also, buyers are more enthusiastic about purchasing a growing business. “When things are expanding and improving, people get emotionally excited. And ultimately, emotions drive a purchase,” he says.
3. Get systems in place to put your business on autopilot.
From a buyer’s point of view, a business is a series of processes and systems that develops a service or product, which is then sold in exchange for money to generate a profit. It is not a hobby or a way of life, as you might see it. It must be a well-oiled machine that can operate on its own.
The price of your business will go up if you can prove you’ve mastered these processes. What have you done over time to increase their efficiency? Do employees follow the processes? Buyers place higher value on companies that can run themselves.
4. Remove yourself from the business.
By the time you put your business on the market, you should be as hands-off as possible. This demonstrates that your top managers and employees can handle running—and continue growing—the business without you. Because eventually, they will have to. “If every decision stops with you, what is a buyer going to buy?” Caruso says.
5. Get the details, like debts and leases, in order.
Your business will sell at a higher price if the details of your business are in order. If you own a convenience store, for example, and its success hinges upon its prime location, you better have a long-term lease sewn down. But if you own an engineering firm that is outgrowing its small office space, a short-term lease is better. “Contracts like these should be in a prime spot to increase the value of your business,” says Caruso.
Debts and other obligations should also have nailed-down arrangements. Uncertainty is not friendly to the valuation of a business, says Caruso.